Fitch Ratings has published its quarterly leveraged market synopsis, 'U.S. Leveraged Market Quarterly.' The report reviews fourth quarter 2014 activity and previews 2015. The energy sector is highlighted in this quarters' publication.
SECTOR SPOTLIGHT: OIL AND GAS
A sharp drop in crude oil prices in fourth quarter 2014 brought renewed focus to high yield energy credit risk. After an accommodating financing and commodity price environment through the first half of 2014, HY spreads have increased dramatically and the HY energy bond market essentially closed in the fourth quarter. Fitch expects near-term credit impacts to be varied as risks differ among energy sectors, with exploration and production (E&P) and oilfield service companies most exposed to lower oil prices.
Sustained lower oil prices in 2015 would have a dual effect on HY E&P companies, with lower cash flow leading to higher leverage, and delayed drilling plans challenging longer-term production growth. Subsequent cash flow and liquidity impacts would be largest on levered companies as they would struggle to attract capital to fund production growth. Fitch expects these companies to go into maintenance mode in the near term, drilling required wells to maintain production and hold acreage in the most economic areas in an attempt to preserve adequate liquidity. HY E&P cash balances are typically low, with firms funding new drilling largely through revolver borrowings. Bank credit facilities will take on increased importance in 2015 as a liquidity bridge towards operating cost reductions and, potentially, higher oil prices in 2016.
2015 U.S. CORPORATES OUTLOOK
Outlooks Broadly Stable; Solid Economic Growth Forecasted: Of the 29 sectors within U.S. Corporates, 25 have Stable sector outlooks, indicating stable industry fundamentals. Fitch forecasts the U.S. economy will grow 3.1% in 2015 and 3% in 2016. Private consumption will be a key growth driver, supported by higher household disposable income and a strengthening labor market. This economic growth will add to improved profitability and strong credit metrics in 2015.
The U.S. high yield default rate ended 2014 at 2.4%, its peak since 2009 but below Fitch's 35-year, 4.1% historical average.
Fitch projects that the default rate will finish in the 1.5%-2% range in 2015. Healthy non-energy company financial performance and minimal debt maturities over the next year contribute to a forecast in line with Fitch's historical 1.9% median rate over the last 35 years.
The full report 'U.S. Leveraged Finance Quarterly' is available at www.fitchratings.com/sectors/Corporate Finance/Leveraged Finance.
For more information, visit: www.fitchratings.com/usleveragedfinance.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch U.S. High Yield Default Insight: 2015 Default Outlook' (December 2014);
--'Fitch U.S. High Yield Default Insight (Imminent Caesars' Default Adds Nearly 90 Basis Points to Rate)' (November 2014);
--'U.S. Leveraged Finance Multiple EV-aluator' (July 2014);
--'Fitch 50 - Structural Profiles of 50 Leveraged Credits' (July 2014);
--'U.S. Leveraged Finance: Road to Recovery (Cross Sector Analysis of Recovery Assumptions and Results)' (April 2014);
--'Leveraged Finance Annual Manual for the Americas' (April 2014).
Applicable Criteria and Related Research: U.S. Leveraged Finance Market Quarterly - Fourth-Quarter Synopsis/2015 Preview
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=853468
Leveraged Finance Annual Manual for the Americas
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746947
Fitch U.S. High Yield Default Insight (2015 Default Outlook)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=832549
Fitch U.S. High Yield Default Insight (Imminent Caesars' Default Adds Nearly 90 Basis Points to Rate)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=812908
U.S. Leveraged Finance Multiple EV-aluator
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749693
Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752040
U.S. Leveraged Finance: Road to Recovery (Cross Sector Analysis of Recovery Assumptions and Results)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744855
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